Connecting the dots – Plotting where gold pricing is headed

Over the last few days, we have been focusing upon the FOMC meeting which concluded on Wednesday of this week. We have spoken about how recent changes in the monetary policy of the Federal Reserve have had an impact on gold pricing. The most important take away from the statement released by the Federal Reserve, and the press conference held by Chairman Jerome Powell was that the Fed intends to keep interest rates near zero at least until the end of 2023.

The information released by the Fed was really an affirmation of a monetary policy change that was announced last month when Chairman Powell delivered the keynote speech to the virtual economic symposium which is normally held in Jackson Hole Wyoming. During the keynote speech market participants heard for the first time that the Fed was revising their monetary policy with two critical changes. These changes are in response to the effect that the global pandemic has had on economic growth in the United States.

The first change was a rebalancing of the target interest rate the Federal Reserve uses as a gauge to determine when it is proper to raise rates. Over the last few years, the Fed has maintained a target interest rate of 2% as a possible trigger to take their Fed funds rate higher, thereby slowing inflation. Last month Chairman Powell announced that they have raised their target which would allow inflationary pressure to rise above 2%. This change was a subtle rebalancing of their dual mandate which is maximum employment with economic growth and the acceptable level of inflation before raising rates. In this way the Federal Reserve is able to put their primary emphasis on maximum employment, in lieu of their focus on the current inflationary pressures.

The second change to the monetary policy of the Federal Reserve was a commitment to maintain interest rates at the current level for an extended period of time. At the conclusion of this week’s FOMC meeting the Fed released the first new “dot plot” since December 2019. The dot plot indicated that voting members almost unanimously voted to keep interest rates near zero until the end of 2023.

Gold prices reacted in a tepid manner, actually trading lower to this week’s statement and new “dot plot”. Many analysts indicated that for the most part these changes had already been factored into the market, as market participants used this information as a reason to take short-term profits. Gold pricing was also pressured by the lack of the U.S. government to pass an additional stimulus package to aid both businesses and individuals who have been dramatically affected by the economic contraction which began in March of this year.

On a technical basis gold has been in a nearly defined trading range. The recent series of lower highs and higher lows has created a pattern called a pennant formation. This pattern begins with a dramatic rise in prices creating a flagpole which is followed by a period of consolidation in which a series of lower highs, and higher lows create a buildup of energy which is released in the form of a price breakout once current pricing reaches the apex of the triangle or pennant. Our studies indicate that we are close to reaching the apex of the pennant.

Even with the volatility inherent in recent, gold continues to maintain its pricing above the 50-day moving average. This indicates that the overall current market sentiment for gold remains extremely bullish. It also suggests that when gold prices reach the apex, the breakout and release of energy will be to the upside.

It is for these reasons that we believe that over time gold will once again challenge $2,000 per ounce, and effectively close above that price point. Once this new price level becomes support the next target will be the record high that was achieved in August when gold ran to $2,088 per ounce. Currently we see major support at $1,920. There is also strong support at the 50-day moving average which is currently fixed at $1,938.50.

Wishing you as always, good trading and good health,